COVID-19 Individual Rebates & Tax Law Changes

Tax Return Deadlines

I am sure almost everyone knows by now the IRS has moved the April 15^th tax deadline to July 15^th.  In addition, the State of Minnesota and Wisconsin has also followed the federal changes.  From our firm’s perspective this was truly a gift and we are much appreciative of this decision.

In addition, any payment due to the IRS (including the 1^st quarter 2020 estimates) can be postponed until July 15^th without penalty or interest. Minnesota & Wisconsin have also delayed the payment on any balance due from the 2019 returns. However, Minnesota did not delay the payment of the 1^st quarter 2020 estimates, but Wisconsin has. If you don’t make the 1^st quarter 2020 Minnesota estimate there could be a small underpayment penalty assessed on your 2020 return. Typically, this is not a significant amount.   

Rebate checks FAQ’s

We have received numerous calls from clients asking when they can expect to receive their rebate check along with questions related to filings. For information directly from the IRS – visit their website.

How much could I expect?

Everyone will receive a check for $1,200 and a married couple would receive $2,400. In addition, families with dependents will receive an additional $500 for each dependent. For example, a family of five will receive a total of $3,900.

Is there an income limit?

There is and it is based on filing status and dependents. The summary below illustrates the three categories of filers.  

Single:

• If your adjusted gross income (AGI) is less than $75,000 there is no adjustment to your rebate check.
• If your AGI exceeds $99,000 you will not receive a check.
• For those with an AGI in excess of $75,000 the rebate is reduced by $5 for each $100 in excess of the threshold.               

Married:

• If your adjusted gross income (AGI) is less than $150,000 there is no adjustment to your rebate check.
• If your AGI exceeds $198,000 and you have no children, you will not receive a check.
• For those with an AGI in excess of $150,000 the rebate is reduced by $5 for each $100 in excess of the threshold.   

Head of Household:

• If your adjusted gross income (AGI) is less than $112,500 there is no adjustment to your rebate check.
• If your AGI exceeds $146,500 with one child, you will not receive a check.
• For those with an AGI in excess of $112,500 the rebate is reduced by $5 for each $100 in excess of the threshold.   

What year are they using to determine eligibility?

If you have not filed your 2019 return the IRS will determine the rebate based on your 2018 return. If you have not filed a 2018 return this may cause a delay in the rebate check and you may not receive it until you file your 2020 return.

Who meets the definition of a dependent?

The definition is the same for determining if you qualify for the child tax credit on your tax return. If your child is under the age of 17, they qualify. If they are over the age of 16, they won’t.

Can a student qualify for the rebate?

If they could have been claimed as a dependent on the parent’s return they do not qualify. If the parents are providing more than 50% of their support, they do not qualify even if the parents did not claim them on their tax returns. In other words, your student will not receive a rebate check if they were (or could have been) claimed as a dependent.       

What if my AGI in 2018 or 2019 is in excess of the limits?

The credit will ultimately be based on your 2020 individual tax returns. If you have not received a check, and are eligible based on the AGI limits, you will receive this rebate when your 2020 tax returns are filed.

What if my AGI for 2020 is greater than the threshold amount?

The good news is you don’t have to pay it back. 

What if I didn’t have to file a return for 2018 or 2019?

The IRS is coordinating with the social security system to identify everyone that is eligible and will be sending out the checks based on the information they have in their system.

Will it come in the form of a check or a direct deposit?

If you have provided direct deposit information, they will send via direct deposit so make sure you check your bank statements. All others will receive a check in the mail.

When can I expect a check?

Based on what we know we would expect the checks to start arriving the week of April 13^th. 

Within 15 days of making the payment the IRS is required to send a letter to the last address on your tax return. If your address changed from 2018 your rebate could be delayed. This could be an issue and I am sure it will create confusion. 

Retirement Plan Contributions, Distributions & RMD’s   

There are significant changes in the legislation that has passed that impact IRA and 401K accounts. Some of the changed include:

• With the tax filing deadline extended to July 15^th the deadline for making 2019 contributions has been moved to July 15^th. 
• Withdrawals from IRA accounts in 2020 that are considered “coronavirus-related distributions” have some special rules:
  • Applies to up to $100,000 of distributions
  • If the 10% penalty for early distribution would have applied, it has been waived
  • Exempts the distribution from the mandatory 20% withholding
  • Allows us to include as income over three years
  • We have up to three years to pay-back if that is the intent.
• Any plan loans from 401K accounts also have changes:
  • The maximum loan amount is increased from $50,000 (or 50% of the vested balance) to $100,000 (or 100% of the vested balance)
  • The due date for repayment on a loan is delayed for one year.
• To be eligible for withdrawal and loan relief, an individual must fall within one of the following categories:
  • You are diagnosed with COVID-19
  • Your spouse or dependent is diagnosed with COVID-19
  • Experienced adverse consequences as a result of:
    • Being quarantined,
    • Being furloughed or laid off,
    • Having work hours reduced due to COVID-19,
    • Being unable to work due to lack of childcare,
    • Closing or reducing hours of a business you own due to COVID-19; or
    • Other factors as determined by the Secretary of the Treasury. 
• The CARES Act suspends RMD’s for 2020      

Commentary

As you can see there are significant changes made within our retirement plan rules. Typically, we would be averse to advising a client to tap retirement plan accounts, but the flexibility provided above creates a potential source of funds with flexibility to manage the tax liability and repayment. However, you do have to be careful if the funds are spent on personal needs and can’t be repaid; there will be a tax liability to be reckoned with.  

Charitable Contributions

The following changes will impact the 2020 individual tax returns

• An additional $300 “above-the-line” contribution to certain charities will be allowed for those individuals who do not itemize. Qualified charities would be any organization that is a 501C (3)
• The 50% of AGI limitation for charitable contributions is suspended and for 2020, the limit is 100% of AGI.
• Donor Advised Funds are not considered a qualified charity.

Student Loan Provisions

The Act suspends student loan payments (principal and interest) through September 30, 2020 without penalty to the borrower for federal student loans. No interest will accrue on these loans during this suspension period. In addition, employers can provide a student loan repayment benefit tax-free to an employee. The amount is $5,250 and applies to any payments made before January 1, 2021.